High inflation, higher EMIs, hard times

Sudhir Verma, a 38-year-old marketing consultant, is juggling multiple work assignments to meet his home loan payments. He says, "Both my wife and I work our regular jobs and then put in extra hours freelancing. We get Rs 1.10-1.25 lakh a month, of which more than half goes towards meeting EMI payments."

Verma had raised a loan of Rs 54 lakh in 2006 to buy a property worth Rs 75 lakh. His EMI has surged from Rs 48,000 to Rs 64,000 in barely 60 months, with the floating interest rate zooming to 14.5% per annum from 8.5%.

And as his home loan repayments have risen, so have other expenses.

"Fuel takes up another Rs 18,000 worth of expenses per month, up from barely Rs 6,000 in 2006. And we need to provide for our 10-year-old son, too," he said. Equated monthly installments (EMIs), the middle-class passport to dreams, can become a nightmare if not watched.

Wholesale price-based inflation rose to 7.55% in August, up from 6.87% in July. The steep price rise, coupled with a general slowdown in the Indian economy, means that the average family's purchasing power remains stagnant, while expenses are riding the elevator.

Frequent interest rate hikes also mean that buying that dream home - the single most important investment that you make in your lifetime - just became that much more of a dream, as realty takes a good, hard bite out of household savings. Not only have property rates risen out beyond affordability for many, EMIs on home loans have scaled record highs.

Home loans on floating interest rates, taken when rates were low, have been jacking up monthly payments. From a low 7.5% as recently as August 2010, base rates rose steadily to 10.5% in August 2012. In line with this, floating rates have risen for consumers.

But home loan customers are not giving up on repayments. Real estate developers say the joy of owning a home offsets the scrimping and saving that customers need to put up with in repayment of loans.

"Increase in EMIs is pinching the pockets of middle-class home buyer but the aspiration to build their own home is much stronger," said Pradeep Jain, chairman, Parsvnath Developers. "The moment they decide to buy a house, they prepare themselves for the uncertainty of floating charges and unpredictable policy announcements. The middle class customer is only possessive about two things: self-owned house and children's health and educational spends. They hardly feel guilty about cutting back their holiday trips, cinema, restaurant bills or even fruits."

Prakash Gurbaxani, founder of QVC Realty, a venture-funded real estate company, said home buyers are now prepared for interest rate elasticity.

"Middle class home buyers who are looking for reasonable houses in the range of Rs 10-80 lakh know the trade off between requirement and desires," he said. "EMIs stop hurting the demand for real estate until and unless there is a really steep increase in interest rates - of over 5%."

Starting September, a cut in base rate by the State Bank of India from 10.00% to 9.75% has brought relief to some borrowers. Also, select public sector banks have declared a marginal rate reduction on home loans, limited to a maximum of 25 basis points (or 0.25 percentage points). Private banks, however, have not indicated that they would follow suit - though market experts feel HDFC may well bite the bullet.

Defaults are rare, say banks, as customers stand to lose their homes. Buyers are instead seeking tenure extensions or going in for loan switch - that is, taking a fresh home loan at discounted rates to pay off the original loan.

Indira Padmini, general manager, retail banking and marketing, Indian Overseas Bank said, "There has been drop in salary for a large section of society and simultaneously interest rates have gone up, but there has been no increase in defaults in home loans primarily because of the stigma attached to defaults. Also, 75 to 80% of the home buyers have taken the benefit of extending the period of repayment."

Verma, for instance, had got to a stage where he could no longer afford the EMIs, and thought of selling off his home. Then, fate intervened.

"My parents offered to help out with 10-15% pre-payment," he said. "I can shave off another few points from the outstanding principal by putting in all available savings. I requested the bank to roll over the old loan at new rates, and they were largely cooperative. I had to pay a 1% processing fee, but the new interest rate is 11.0% - which is a major relief since my current rate was 14.5%."

With the country going in for fiscal adjustments with tough economic measures, it seems words of wisdom for home-buyers would be: Pre-pay your loan as much as you can, and negotiate a rollover of your loan.